The Ontario Securities Commission is presently holding an inquiry to investigate the actions of "Coventree Inc,"' prior to the collapse of ABCP in August 2007. A brief description of today's proceedings is available at the following link:

"Coventree Inc., the largest player in Canada's collapsed ABCP market, knew about the growing fear among investors around subprime mortgages long before demand for ABCP imploded in August 2007....but did not disclose these worries (to) the broader market. Instead, Ms. Waechter said, the company sought to deal with the issue by disclosing limited information ...on July 24 to select investment dealers detailing subprime holdings in trusts it sponsored";In a further measure, it began shifting unwanted subprime home loans about among its trusts to satisfy large clients such as the Caisse de depot et placement du Quebec"; andFailed to disclose to investors that its business would be seriously hurt by DBRS changes to the way it rated it rated asset backed commercial paper".This testimony may be directly relevant to the potential criminal fraud that we have requested that IMET investigate on behalf of the ABCP retail owners. It is my understanding, based on discussion with you, that this information will not be made available to IMET unless OSC makes a determination that they have detected criminal fraud. However it is our position that IMET, not the self regulatory bodies such as the OSC or IIROC, should be responsible for determining whether criminal fraud has been committed.

If IMET cannot access the information being obtained by the OSC, I would like to request that a representative of IMET attend the ongoing OSC hearings and record any information or potential evidence that may be relevant to the file on potential criminal fraud associated with the manufacture and sale of ABCP prior to August 13, 2007.

Please don't hesitate to call me at 1250-595-0653 should you wish to discuss this request.

(advocate.....according to one witness who attended the hearing mentioned in this article by John Greenwood, Conventree is documented as having "shuffled the deck" moving bad assets out of their best client's accounts (the caisse) and putting them into less sophisticated accounts.......wish we had ability to prosecute criminally in Canada)

Wednesday, May 12, 2010

Coventree promoted ABCP to calm markets, OSC saysJohn Greenwood, Financial Post Norm Betts/Bloomberg NewsCoventree Inc., the largest player in Canada's collapsed ABCP market, knew about the growing fear among investors around subprime mortgages long before demand for ABCP imploded in August 2007, said a lawyer for the Ontario Securities Commission.

Jane Waechter said Coventree was fielding calls from concerned investors about exposure to dodgy U.S. home loans as early as the first quarter of 2007, but did not disclose these worries the broader market.

Instead, Ms. Waechter said, the company sought to deal with the issue by disclosing limited information to its dealers and major investors, but the move only boosted their anxiety.

The allegations come on the first day of regulatory hearings into whether Coventree properly disclosed information about its troubles to shareholders.

Ms. Waechter said the company knew that demand for some of its ABCP was disappearing a day after it sent an email on July 24 to select investment dealers detailing subprime holdings in trusts it sponsored.

In a bid to calm the market, the company hiked the interest on its paper, according to the OSC.

In a further measure, it began shifting unwanted subprime home loans about among its trusts to satisfy large clients such as the Caisse de depot et placement du Quebec, Ms. Waechter said.

Despite such moves the ABCP market continued to deteriorate, with prices falling as buyers retreated.

At the start of August 2007 -- nearly two weeks before the market froze up completely -- Coventree management deemed the situation so serious they called an emergency board meeting at which a possible press release about the problem was discussed, but never issued, the lawyer for the OSC said.

Diane Urquhart was recently in town to tell us about our $30 million investment in three magic beans. Our local city of lethbridge got suckered into buying these magic investments by a combination of a fast talking commission sales geek, and a very inexperienced city treasurer who ignored our city investment policy or got suckered by the silver tongued sales geek. (either way, Lethbridge is a bit behind in best practices for professional money management)

Diane told (and showed) us how the asset backed commercial paper that we were sold was neither asset backed, nor commercial paper. It (the money) was immediately placed into "trusts" and those trusts were immediately pledged as security to Deutsche Bank of Franfurt Germany, as collateral in a crazy insurance scheme (see credit default swaps on google) where OUR money was used to insure the loan losses of Deutsche Bank. Loan losses that were likely to come about as a result of investments in sub prime mortgages.

We were the unwitting provider of insurance on their loans. Wow! That is quite a lot to swallow.

The liquidity (read guarantees) agreements that Deutsche Bank provided on this investment which allowed it to earn it's R1 rating by DBRS (no one else would touch it) turned out to be false, and probably fraudulent. Certainly the circular flow of money, (us insuring their bad debts, them guaranteeing us that we would not lose money if they demanded payment) made it look fraudulent, like a "magic money machine".

We have once again been duped by an investment industry bound and determined to earn a fee, by honest or dishonest means.

I recommend anyone interested in fraud by "trusted criminals" such as that done in the case of ABCP listen to the podcast on PBS BILL MOYERS JOURNAL as he interviews BILL BLACK from the University of KC in Missouri

Bill is one of America's "godfathers" if you will, of study and research into "trusted criminals".

some excerpts:

In Sept 2004 the FBI warns that there is "an epidemic of mortgage fraud" building. They said that if it was allowed to continue that it would produce a crisis as least as large as the S&L debacle. No response.

Now we learn that after the attacks of sept 11, 2001, the US Justice Department transferred 500 white collar specialists from the FBI to the role of national terrorism. Bush never replaces the 500 vacant positions.

We end up with a crisis at least 100 times worse than the S&L crisis, and one that nearly bankrupted the US financial system and brought the economy to a halt.

There are now 1/5 as many FBI agents in this area, as there were working to figure out the S&L crisis.

Brooksley Borne, a US commodities regulator tried to save us from ourselves, and the wizards of wall street blocked her and put her out of business. Allen Greenspan was one of the key players who took her out of the game, and this one of the key players who ruined the US economy.

The US administration is so frightened of world collapse that they go about hiring the very people who got the USA into the mess, and they allow them to help hide from the american public that extent of the damage. Hire "yes" men to help you hide the body. Makes sense.Government is too cozy with the bankers. They dont want to find the scope of the problem. (sorry for the note taking style, but I am typing while listening to the podcast)Hire the very people who failed the system and let them help you hide the bodies.......Tim Geithner was one of the nations top banking regulators during the entire debacle and yet he ends up in Obama's financial admin team. He failed in every way.Paulson was former head of goldman Sachs, and is now treasury secretary??

that is like putting the ......you know the analogyAs long as we keep the old guard that made the problems, they will not go too hard in trying to be open about the problems.They violate the laws to hide their crimes. They simply refuse to obey the laws.

The USA sent $5 billion in subsides to UBS bank, as swiss bank at the same time that UBS was under criminal investigation for tax evasion against the US. They eventually paid $780 million in fines for such tax evasion, with the money $5 billion that the US gave them???

In clinton's administration the powers that be rescind the Glass Seagall act of the 1930's that called for a separation between banking and investment banking due to its help in causing the great depression. they thought we were smarter now. We were not.

No one tries to learn the facts, to investigate, like they do after an airplane crash, to find out what went wrong and who to avoid in future. No we do not do that with finance. We pocket the money, and bury the bodies. We fail to learn.People in political power act in concert to hide financial crimes because it is in everyones best interest to hide and cover up malfeasance. (everyone except the taxpayer that is, and they get no voice in the matter, just the bill)(I can see that right down to my local municipality (lethbridge) wanting to have the ABCP issue please go away by city council members)The reagan administration's main priority during the S&L Crisis, was to cover up the losses due to the political implications. (he would know this better than anyone)

It is more than a financial crisis, it is a moral crisis.A relatively few well heeled people were able to bring the economy to its knees for their own selfish greed."It is not necessary to hope in order to persevere"Get rid of the people who have caused the problems.(we are now promoting them instead)The interview is titled "CORRUPTION IN AMERICAS BANKS"

http://www.osc.gov.on.ca/documents/en/P ... entree.pdfAccording to independent financial analyst Diane Urquhart, the provincial securities commissions, including the OSC, exempted the Non Bank ABCP from being sold by a registered dealer and by prospectus, if it has an approved credit rating from an approved credit rating organization as defined in National Instrument 45-106. The provincial securities commissions were enablers of DBRS being the only credit rating organization providing top credit ratings for the Non Bank ABCP. The provincial securities commissions could have forced the Non- Bank ABCP sponsors to prepare prospectuses for their commercial paper when Standard & Poor's reported that the Non -Bank ABCP was below investment grade in 2002. Instead, the provincial securities commissions granted Mutual Reliance Review System for Exemptive Relief decisions that allowed the dealers to proceed with distribution of the money market paper on just the one credit rating from DBRS passing the minimum credit rating standard in the regulations.

I am enclosing a request for a criminal investigation into the manufacture, credit rating and sale of Canadian Non Bank Asset Backed Commercial Paper (ABCP).

I am aware that IMET has previously declined similar requests. However the recent rulings by the Ontario Security Commission and the Investment Industry Regulatory Organization of Canada indicate that there are sufficient grounds to warrant such an investigation (see attachments).

Our letter is directed to your office due to the importance of this issue and the diverse geographical location of the complainants.

I was requested to appear before the House of Commons Justice and Human Rights Committee on December 9, 2009 and discussed ABCP related issues pertaining to proposed amendments to the Criminal Code contained in Bill C-52. I will be forwarding a copy of this email to the Committee to ensure they are informed of recent developments. Our request will also be released to the media due to the widespread interest in this matter.

Individual noteholders from across the country are now coming out of the woodwork, and networking on Facebook, to tell their stories of devastating losses from risky investments that few people really understand.

There are an estimated 1,600 of these retail investors, according to insiders. They are frustrated and angry and in no mood to make concessions. Yet the future of a crucial restructuring of the asset-backed commercial paper market rests in their hands.

Having frozen the market for these notes back in August to plot a rescue plan, the banks and financial institutions involved announced their solution earlier this month: New notes would be created and the entire restructuring placed in bankruptcy protection. This would allow the group to move through its final, delicate stages without external distractions such as lawsuits.

The final vote for the restructuring plan will take place on April 25. It must be approved by a majority of noteholders. Since there are only around 200 corporate and institutional investors, the fate of the biggest workout in Canadian corporate history may now rest in the hands of the little guy.

Much hangs in the balance. A "no," vote means the restructuring fails and the trusts that issued the stalled notes go into receivership, possibly triggering a financial meltdown, analysts warn.

If the restructuring is approved, the markets would carry on and the notes unfrozen. But according to a recent RBC Capital Markets research report, some of the notes may have lost 80% of their value.

And there's a trade-off: A clause in the deal would provide legal protection to all the banks, investment dealers and others who created and sold the ABCP. If investors agree to the restructuring, they must also promise not to sue to get their money back.

Beginning today in Toronto, Purdy Crawford, the Bay Street lawyer who heads up the investors committee, will be travelling to major Canadian cities to persuade investors to sign on to the plan. He faces an uphill battle.

Financial Post spoke to six retail investors to get their stories.

'Little guys speak out'

The committee that has put together a plan to restructure the market for the asset-backed commercial paper in Canada, frozen since August, today begins hawking its merits to those who will vote on it on April 25. What the committee, headed by Purdy Crawford, didn't reckon on are the 1,600 or so small retail investors who are faced with potentially losing their life savings. The Financial Post's John Greenwood and Grant Surridge look at six of their stories.

---

Ron Lawley will never look at investment dealers the same way again. A retired computer technician, Mr. Lawley lives in Nanaimo, British Columbia, where until recently he and his wife enjoyed a modest but satisfying lifestyle. Then came last summer's credit crunch, and for the first time Mr. Lawley learned the term "asset-backed commercial paper." The education, he says, came from his broker, who informed him last September that he owned about $210,000 of the stuff, but not to worry, that it was only a "glitch" in the market that was making his money --about one-quarter of his savings --inaccessible.

"This is absolutely ridiculous," he said in an interview. "I'm 72, I've worked all my life, I've never had a day without a job and this is how I get treated. This stuff should never have been sold to people like me."

He is especially upset about the way he came to own an asset he still doesn't fully understand. Having told his broker to put his money in government bonds, he was surprised to discover unfamiliar names of these notes on his statement. Last week, someone sent him a copy of the nearly 400-page document that outlines how the ABCP restructuring will work. "I'm not even going to read it." he says. "I just want my money back." John Greenwood

---

It was August when Brian Iler first read about ABCP while he was on vacation. While technical, the stories said people lost money. The Toronto-based lawyer felt sorry for them.

When he got home there was a letter from his broker. It was to say his account held about $229,000 of ABCP. "I was totally shocked," recalls Mr. Iler, who says he told his broker he wanted secure investments.

After asking questions, he eventually got hold of a DBRS report that "clearly describes a very risky investment."

For his part, the broker insisted he had followed instructions and that all would be fine in the end. But, at 62, Mr. Iler figures he may end up having to delay retirement .

What bothers Mr. Iler most, however, is the way retail investors have been treated. He reckons the little guys only ended up with the power in this restructuring because the banks were so focused on finding a solution that worked for them that they failed to see what was given away.

"When the penny dropped, there must have been someone with a lot of egg on his face," Mr. Isler says. J.G.

---

Yulan Wong was successful as a Vancouver real estate agent before she retired, but now she counts her pennies when she goes to the supermarket.

About two years ago, her broker started putting Ms. Wong's savings into ABCP, saying it was for "diversification."

"She said it was guaranteed by the Royal Bank of Scotland and Barclays Bank," Ms. Wong says.

Ms. Wong, who is 62, says she has about $300,000 tied up in illiquid ABCP. Just over half the money in Ms. Wong's account was savings she planned to live on. The other half belongs to her niece. When ger parents died several years ago, Ms. Wong became her guardian. "I told her I don't have the money, I can't give it back to you," she says. "It's caused a lot of stress in the family."

"I've worked very hard all my life, I've never complained. But this is too much."

Unable to persuade her broker to buy back the investment. Ms. Wong is pinning her hopes on a bid by small note-holders to try to force a better deal from those trying to restructure the market. J.G.

---

"You can't get your money, man. It's frozen." That's what Reid Moseley's friend and broker told him last August when he went to withdraw the cash he had temporarily parked in ABCP while waiting to close the purchase of his dream home in the Calgary suburbs.

The 61-year-old retired teacher and father of four says his broker said there was no risk, that he would get a better return than with Treasury Bills. He figured it was a no-brainer -- better than having his $50,000 nest egg sitting in the bank not earning interest.

Now he's had to take out a $30,000 line of credit to pay the bridge-loan tied to his new home. It's sucking up capital from his hobby business selling antiques, and he doesn't know how much he will get back.

He doesn't blame his broker for the fiasco, but is furious the major banks will not come to the rescue of small investors who ended up with money in investments those banks were supposed to back in a crisis.

Mr. Moseley feels cut off from a restructuring process conducted behind closed doors by lawyers and bankers who don't know what it is like to be in his situation. "That $50,000 represents my life and my wife's life work in terms of what we were able to put aside," says Mr. Moseley. Grant Surridge

---

Nick Kovics was specific in the instructions he gave his broker about the $100,000 he decided to invest. "This is money I cannot lose," he says. "This is my safety net." The 34-year-old chemical engineer and part-time MBA student had always managed his own investments, but on the recommendation of friends, he went with a broker who told him that putting the money in asset-backed commercial paper was safe.

He first heard about the frozen ABCP by reading the newspaper. Even when his broker confirmed the situation he was not initially worried. But he got anxious as as each extension and deadline passed. "It's got me nervous now." He's wondering when and if he'll get his money back.

Unlike other investors who are close to retirement, Mr. Kovics can afford to wait out a lengthy lawsuit. He'll vote against the proposal unless all his money is returned.

But what's most galling for Mr. Kovics is that he invested the money at the end of July, two weeks before the market for the paper froze up.

He says that as a young investor, he has always been willing to take on risk and has managed his portfolio through bear markets before. The first time he chose to trust some money with a professional, he is suffering what may be his biggest loss ever. "The irony is unbelievable." G.S.

---

Mike and Wynne Miles are anguishing over how to vote on the ABCP restructuring plan. In their late 50s, the couple has a significant portion of their savings tied up in the paper. Since both are self-employed, they have no pension, and they have two kids they're putting through university. They say their broker didn't even tell them he was putting their retirement money into ABCP.

Now they worry that if they vote for the deal, they'll forfeit their right to sue and be forced to wait years to get their money back, with no interest earned in the meantime.

"We can't afford to wait that long," Ms. Miles says softly. The couple are also terrified of what voting "no" might mean: That the deal collapses and they lose everything.

The couple plans to fly to Vancouver this Wednesday to hear Mr. Crawford pitch the restructuring plan to investors, although they are worried they won't know what to ask.

Mr. Miles also questions the money being spent trying to fix the ABCP mess. "All sorts of people are being paid to fix this thing, and it's the same people who broke it in the first place." G.S.

A New York Times view of how things got started in the United States, before being let into Canada by our industry paid securities commissions.

December 24, 2009Banks Bundled Bad Debt, Bet Against It and Won

By GRETCHEN MORGENSON and LOUISE STORYIn late October 2007, as the financial markets were starting to come unglued, a Goldman Sachs trader, Jonathan M. Egol, received very good news. At 37, he was named a managing director at the firm.

Mr. Egol, a Princeton graduate, had risen to prominence inside the bank by creating mortgage-related securities, named Abacus, that were at first intended to protect Goldman from investment losses if the housing market collapsed. As the market soured, Goldman created even more of these securities, enabling it to pocket huge profits.

Goldman’s own clients who bought them, however, were less fortunate.

Pension funds and insurance companies lost billions of dollars on securities that they believed were solid investments, according to former Goldman employees with direct knowledge of the deals who asked not to be identified because they have confidentiality agreements with the firm.

Goldman was not the only firm that peddled these complex securities — known as synthetic collateralized debt obligations, or C.D.O.’s — and then made financial bets against them, called selling short in Wall Street parlance. Others that created similar securities and then bet they would fail, according to Wall Street traders, include Deutsche Bank and Morgan Stanley, as well as smaller firms like Tricadia Inc., an investment company whose parent firm was overseen by Lewis A. Sachs, who this year became a special counselor to Treasury Secretary Timothy F. Geithner.

How these disastrously performing securities were devised is now the subject of scrutiny by investigators in Congress, at the Securities and Exchange Commission and at the Financial Industry Regulatory Authority, Wall Street’s self-regulatory organization, according to people briefed on the investigations. Those involved with the inquiries declined to comment.

While the investigations are in the early phases, authorities appear to be looking at whether securities laws or rules of fair dealing were violated by firms that created and sold these mortgage-linked debt instruments and then bet against the clients who purchased them, people briefed on the matter say.

One focus of the inquiry is whether the firms creating the securities purposely helped to select especially risky mortgage-linked assets that would be most likely to crater, setting their clients up to lose billions of dollars if the housing market imploded.

Some securities packaged by Goldman and Tricadia ended up being so vulnerable that they soured within months of being created.

Goldman and other Wall Street firms maintain there is nothing improper about synthetic C.D.O.’s, saying that they typically employ many trading techniques to hedge investments and protect against losses. They add that many prudent investors often do the same. Goldman used these securities initially to offset any potential losses stemming from its positive bets on mortgage securities.

But Goldman and other firms eventually used the C.D.O.’s to place unusually large negative bets that were not mainly for hedging purposes, and investors and industry experts say that put the firms at odds with their own clients’ interests.

“The simultaneous selling of securities to customers and shorting them because they believed they were going to default is the most cynical use of credit information that I have ever seen,” said Sylvain R. Raynes, an expert in structured finance at R & R Consulting in New York. “When you buy protection against an event that you have a hand in causing, you are buying fire insurance on someone else’s house and then committing arson.”

Investment banks were not alone in reaping rich rewards by placing trades against synthetic C.D.O.’s. Some hedge funds also benefited, including Paulson & Company, according to former Goldman workers and people at other banks familiar with that firm’s trading.

Michael DuVally, a Goldman Sachs spokesman, declined to make Mr. Egol available for comment. But Mr. DuVally said many of the C.D.O.’s created by Wall Street were made to satisfy client demand for such products, which the clients thought would produce profits because they had an optimistic view of the housing market. In addition, he said that clients knew Goldman might be betting against mortgages linked to the securities, and that the buyers of synthetic mortgage C.D.O.’s were large, sophisticated investors, he said.

The creation and sale of synthetic C.D.O.’s helped make the financial crisis worse than it might otherwise have been, effectively multiplying losses by providing more securities to bet against. Some $8 billion in these securities remain on the books at American International Group, the giant insurer rescued by the government in September 2008.

From 2005 through 2007, at least $108 billion in these securities was issued, according to Dealogic, a financial data firm. And the actual volume was much higher because synthetic C.D.O.’s and other customized trades are unregulated and often not reported to any financial exchange or market.

Goldman Saw It Coming

Before the financial crisis, many investors — large American and European banks, pension funds, insurance companies and even some hedge funds — failed to recognize that overextended borrowers would default on their mortgages, and they kept increasing their investments in mortgage-related securities. As the mortgage market collapsed, they suffered steep losses.

A handful of investors and Wall Street traders, however, anticipated the crisis. In 2006, Wall Street had introduced a new index, called the ABX, that became a way to invest in the direction of mortgage securities. The index allowed traders to bet on or against pools of mortgages with different risk characteristics, just as stock indexes enable traders to bet on whether the overall stock market, or technology stocks or bank stocks, will go up or down.

Goldman, among others on Wall Street, has said since the collapse that it made big money by using the ABX to bet against the housing market. Worried about a housing bubble, top Goldman executives decided in December 2006 to change the firm’s overall stance on the mortgage market, from positive to negative, though it did not disclose that publicly.

Even before then, however, pockets of the investment bank had also started using C.D.O.’s to place bets against mortgage securities, in some cases to hedge the firm’s mortgage investments, as protection against a fall in housing prices and an increase in defaults.

Mr. Egol was a prime mover behind these securities. Beginning in 2004, with housing prices soaring and the mortgage mania in full swing, Mr. Egol began creating the deals known as Abacus. From 2004 to 2008, Goldman issued 25 Abacus deals, according to Bloomberg, with a total value of $10.9 billion.

Abacus allowed investors to bet for or against the mortgage securities that were linked to the deal. The C.D.O.’s didn’t contain actual mortgages. Instead, they consisted of credit-default swaps, a type of insurance that pays out when a borrower defaults. These swaps made it much easier to place large bets on mortgage failures.

Rather than persuading his customers to make negative bets on Abacus, Mr. Egol kept most of these wagers for his firm, said five former Goldman employees who spoke on the condition of anonymity. On occasion, he allowed some hedge funds to take some of the short trades.

Mr. Egol and Fabrice Tourre, a French trader at Goldman, were aggressive from the start in trying to make the assets in Abacus deals look better than they were, according to notes taken by a Wall Street investor during a phone call with Mr. Tourre and another Goldman employee in May 2005.

On the call, the two traders noted that they were trying to persuade analysts at Moody’s Investors Service, a credit rating agency, to assign a higher rating to one part of an Abacus C.D.O. but were having trouble, according to the investor’s notes, which were provided by a colleague who asked for anonymity because he was not authorized to release them. Goldman declined to discuss the selection of the assets in the C.D.O.’s, but a spokesman said investors could have rejected the C.D.O. if they did not like the assets.

Goldman’s bets against the performances of the Abacus C.D.O.’s were not worth much in 2005 and 2006, but they soared in value in 2007 and 2008 when the mortgage market collapsed. The trades gave Mr. Egol a higher profile at the bank, and he was among a group promoted to managing director on Oct. 24, 2007.

“Egol and Fabrice were way ahead of their time,” said one of the former Goldman workers. “They saw the writing on the wall in this market as early as 2005.” By creating the Abacus C.D.O.’s, they helped protect Goldman against losses that others would suffer.

As early as the summer of 2006, Goldman’s sales desk began marketing short bets using the ABX index to hedge funds like Paulson & Company, Magnetar and Soros Fund Management, which invests for the billionaire George Soros. John Paulson, the founder of Paulson & Company, also would later take some of the shorts from the Abacus deals, helping him profit when mortgage bonds collapsed. He declined to comment.

A Deal Gone Bad, for Some

The woeful performance of some C.D.O.’s issued by Goldman made them ideal for betting against. As of September 2007, for example, just five months after Goldman had sold a new Abacus C.D.O., the ratings on 84 percent of the mortgages underlying it had been downgraded, indicating growing concerns about borrowers’ ability to repay the loans, according to research from UBS, the big Swiss bank. Of more than 500 C.D.O.’s analyzed by UBS, only two were worse than the Abacus deal.

Goldman created other mortgage-linked C.D.O.’s that performed poorly, too. One, in October 2006, was a $800 million C.D.O. known as Hudson Mezzanine. It included credit insurance on mortgage and subprime mortgage bonds that were in the ABX index; Hudson buyers would make money if the housing market stayed healthy — but lose money if it collapsed. Goldman kept a significant amount of the financial bets against securities in Hudson, so it would profit if they failed, according to three of the former Goldman employees.

A Goldman salesman involved in Hudson said the deal was one of the earliest in which outside investors raised questions about Goldman’s incentives. “Here we are selling this, but we think the market is going the other way,” he said.

A hedge fund investor in Hudson, who spoke on the condition of anonymity, said that because Goldman was betting against the deal, he wondered whether the bank built Hudson with “bonds they really think are going to get into trouble.”

Indeed, Hudson investors suffered large losses. In March 2008, just 18 months after Goldman created that C.D.O., so many borrowers had defaulted that holders of the security paid out about $310 million to Goldman and others who had bet against it, according to correspondence sent to Hudson investors.

The Goldman salesman said that C.D.O. buyers were not misled because they were advised that Goldman was placing large bets against the securities. “We were very open with all the risks that we thought we sold. When you’re facing a tidal wave of people who want to invest, it’s hard to stop them,” he said. The salesman added that investors could have placed bets against Abacus and similar C.D.O.’s if they had wanted to.

A Goldman spokesman said the firm’s negative bets didn’t keep it from suffering losses on its mortgage assets, taking $1.7 billion in write-downs on them in 2008; but he would not say how much the bank had since earned on its short positions, which former Goldman workers say will be far more lucrative over time. For instance, Goldman profited to the tune of $1.5 billion from one series of mortgage-related trades by Mr. Egol with Wall Street rival Morgan Stanley, which had to book a steep loss, according to people at both firms.

Tetsuya Ishikawa, a salesman on several Abacus and Hudson deals, left Goldman and later published a novel, “How I Caused the Credit Crunch.” In it, he wrote that bankers deserted their clients who had bought mortgage bonds when that market collapsed: “We had moved on to hurting others in our quest for self-preservation.” Mr. Ishikawa, who now works for another financial firm in London, declined to comment on his work at Goldman.

Profits From a Collapse

Just as synthetic C.D.O.’s began growing rapidly, some Wall Street banks pushed for technical modifications governing how they worked in ways that made it possible for C.D.O.’s to expand even faster, and also tilted the playing field in favor of banks and hedge funds that bet against C.D.O.’s, according to investors.

In early 2005, a group of prominent traders met at Deutsche Bank’s office in New York and drew up a new system, called Pay as You Go. This meant the insurance for those betting against mortgages would pay out more quickly. The traders then went to the International Swaps and Derivatives Association, the group that governs trading in derivatives like C.D.O.’s. The new system was presented as a fait accompli, and adopted.

Other changes also increased the likelihood that investors would suffer losses if the mortgage market tanked. Previously, investors took losses only in certain dire “credit events,” as when the mortgages associated with the C.D.O. defaulted or their issuers went bankrupt.

But the new rules meant that C.D.O. holders would have to make payments to short sellers under less onerous outcomes, or “triggers,” like a ratings downgrade on a bond. This meant that anyone who bet against a C.D.O. could collect on the bet more easily.

“In the early deals you see none of these triggers,” said one investor who asked for anonymity to preserve relationships. “These things were built in to provide the dealers with a big payoff when something bad happened.”

Banks also set up ever more complex deals that favored those betting against C.D.O.’s. Morgan Stanley established a series of C.D.O.’s named after United States presidents (Buchanan and Jackson) with an unusual feature: short-sellers could lock in very cheap bets against mortgages, even beyond the life of the mortgage bonds. It was akin to allowing someone paying a low insurance premium for coverage on one automobile to pay the same on another one even if premiums over all had increased because of high accident rates.

At Goldman, Mr. Egol structured some Abacus deals in a way that enabled those betting on a mortgage-market collapse to multiply the value of their bets, to as much as six or seven times the face value of those C.D.O.’s. When the mortgage market tumbled, this meant bigger profits for Goldman and other short sellers — and bigger losses for other investors.

Selling Bad Debt

Other Wall Street firms also created risky mortgage-related securities that they bet against.

At Deutsche Bank, the point man on betting against the mortgage market was Greg Lippmann, a trader. Mr. Lippmann made his pitch to select hedge fund clients, arguing they should short the mortgage market. He sometimes distributed a T-shirt that read “I’m Short Your House!!!” in black and red letters.

Deutsche, which declined to comment, at the same time was selling synthetic C.D.O.’s to its clients, and those deals created more short-selling opportunities for traders like Mr. Lippmann.

Among the most aggressive C.D.O. creators was Tricadia, a management company that was a unit of Mariner Investment Group. Until he became a senior adviser to the Treasury secretary early this year, Lewis Sachs was Mariner’s vice chairman. Mr. Sachs oversaw about 20 portfolios there, including Tricadia, and its documents also show that Mr. Sachs sat atop the firm’s C.D.O. management committee.

From 2003 to 2007, Tricadia issued 14 mortgage-linked C.D.O.’s, which it called TABS. Even when the market was starting to implode, Tricadia continued to create TABS deals in early 2007 to sell to investors. The deal documents referring to conflicts of interest stated that affiliates and clients of Tricadia might place bets against the types of securities in the TABS deal.

Even so, the sales material also boasted that the mortgages linked to C.D.O.’s had historically low default rates, citing a “recently completed” study by Standard & Poor’s ratings agency — though fine print indicated that the date of the study was September 2002, almost five years earlier.

At a financial symposium in New York in September 2006, Michael Barnes, the co-head of Tricadia, described how a hedge fund could put on a negative mortgage bet by shorting assets to C.D.O. investors, according to his presentation, which was reviewed by The New York Times.

Mr. Barnes declined to comment. James E. McKee, general counsel at Tricadia, said, “Tricadia has never shorted assets into the TABS deals, and Tricadia has always acted in the best interests of its clients and investors.”

Mr. Sachs, through a spokesman at the Treasury Department, declined to comment.

Like investors in some of Goldman’s Abacus deals, buyers of some TABS experienced heavy losses. By the end of 2007, UBS research showed that two TABS deals were the eighth- and ninth-worst performing C.D.O.’s. Both had been downgraded on at least 75 percent of their associated assets within a year of being issued.

Tricadia’s hedge fund did far better, earning roughly a 50 percent return in 2007 and similar profits in 2008, in part from the short bets.

"This works out to something like 0.5 cents on the dollar. This is a pittance. It's nothing "- Michael Miles, 60, the Victoria, B.C.-based chairman of the Retail ABCP Owners Committee commenting on the modest $138.8 million in fines negotiated with 7 firms involved with the $32 billion non-bank ABCP scandal

Small penalties paid for $32 Billion non-bank ABCP fiascoSeven financial services firms have agreed to pay a modest $138.8 million in penalties and costs in connection with the investigations into the non-bank asset-backed commercial paper (ABCP) market. Settlements were reached behind closed doors between the Autorité des marchés financiers (AMF), the Ontario Securities Commission (OSC) and the Investment Industry Regulatory Organization of Canada (IIROC) and seven institutions involved in the Canadian third party ABCP market. The Canadian $32 billion ABCP market ground to a halt in August 2007 amid fears that the assets behind the notes included U.S. subprime mortgages and other high-risk loans. Thousands of Canadians suffered, some brutally, from the aftershock. National Bank Financial Inc.’s settlement totals $75 million, including an administrative penalty of $70 million, $4 million to fund an investor education campaign, and $1 million in investigation costs. The OSC reached 2 settlements: one with CIBC and CIBC World Markets Inc. and the other with HSBC Bank Canada. IIROC reached 3 settlements, with Scotia Capital Inc., Canaccord Financial Ltd. and Credential Securities Inc. The AMF reached two settlements, one with National Bank Financial, and the other with Laurentian Bank Securities Inc. The administrative penalties and investigation costs ( not identified) to be paid by the firms is as follows:• National Bank Financial Inc. (TSX:NA), $75 million• Scotia Capital Inc. (TSX:BNS), $29.27 million [ includes $320K costs]• CIBC and CIBC World Markets Inc. (TSX:CM), $22 million• HSBC Bank Canada, $6 million• Laurentian Bank Securities Inc. (TSX:LB), $3.2 million• Canaccord Financial Ltd. (TSX:CCI), $3.1 million• Credential Securities Inc., $0.2 million“With regard to financial penalties imposed, a fair and appropriate use for the sanction monies will be determined in accordance with applicable laws, court orders and in the public interest,” the regulators said in a joint release. The settlements work out to just $430 per million dollars of grief unleashed on investors . The penalties amount to less than the fees advisors, lawyers and accountants took home* to restructure the toxic ABCP into long-term notes, most of which still aren't tradable. None of the regulators assisted retail investors in their 2-year successful battle for recovery of assets with the huge institutions. * According to documents filed in connection with the proposed $32-billion restructuring, lawyers for the investors committee, their financial advisors JP Morgan and others had been paid or submitted invoices for $199.1-million as of Dec. 8, 2008.The lion's share of that money - $87-million – went to JPMorgan, the New York financial advisor contracted by the investor committee to figure out how to convert the $32-billion of frozen paper into long- term notes.

While the majority of retail asset backed commercial paper investors got 100% of their principal investment back, many believe the firms that sold ABCP have received little more than a slap on the wrist in their settlement with securities regulators.

Members of the ABCP Retail Owners Committee argue the $138.8 million in penalties were far too small in comparison to the scope of the ABCP market, which was estimated at $32 billion.

"The first thing that hit me is that they only have to pay $138 million out of 32 billion dollars, which as a settlement represents roughly .04 cents on the dollar," says Layne Arthur, an Alberta-based investor who had the proceeds from the sale of his family farm locked up in what he thought was a safe investment. "Everybody involved in this settlement got immunity. They do not lose their right to practice at any of the banks or in the investment community at large."

Arthur fought for 18 months to get his money back.

"Everybody is walking around with smiles pretending this is all behind them. I think this is still a case of fraud. I would like to see a criminal investigation as to who knew what," Arthur says. "Luckily, I was one of the guys with less than a million dollars invested, so I got paid out. I just got my last cheque a month ago. I've wasted a whole year on this thing, and it was so frustrating. The lingering problem is this is going to happen again. People will be able to put together some fraudulent garbage and pass it off as a savings program."

The ABCP Retail Owners Committee says it has been unable to get criminal action taken against firms.

"Our representative's appeals for assistance from the RCMP's Integrated Market Enforcement Team were referred to the self regulatory bodies. 'Small folks' like ourselves were simply left to 'duke it out' with some of the largest financial organizations in the country," a release from the committee says.

Arthur expressed frustration at being passed around by enforcement agencies when the committee lodged its complaint.

"The system is broken. You cannot have the fox guarding the hen house. You need a totally independent police force that we can go to. I think there are 32 different arms of investigators at different levels, and all of them just referred us to the next outfit," he says.

Independent financial analyst and well-known investor advocate, Diane Urquhart, worked closely with the group in getting their money back. She says this last chapter in the ABCP proceedings highlights serious deficiencies in Canada's capital markets and banking structure.

"I am pleased to see that the securities regulators have finally brought seven securities dealers into settlement agreements as penalty for their sale of toxic ABCP into the public markets," she says. "The public announcement of these securities regulatory settlements demonstrates to the world that the Canadian banks were significant players in the international structured credit crisis, albeit indirectly through their wholly owned investment banks."

Urquhart believes the restructuring process allowed banks to skirt their responsibilities since they were not required to buy the ABCP back from investors.

"No Canadian banks required a government bailout because they had sold the toxic asset backed commercial paper from their inventories to their customers and because they were not forced to buy this bad paper back like the other banks of the world were required to do," she says. "Also, unlike in other countries, the Canadian bankruptcy courts gave full immunity from lawsuits by the ABCP owners against the Canadian banks and investment bank distributors of this toxic product. So, it was not the Canadian banks that took massive writedowns, but the customers of the Canadian banks and investment banks."

Urquhart believes the penalties that were handed out do little to deter or reform the type of sales practices amongst Canada's investment dealers that led to the ABCP crisis.

"With banks making billions of dollars in profit each year, miniscule monetary penalties such as this one, will not have any deterrence on the sale of toxic investments like ABCP in the future," she says. "Deterrence only comes when the well-paid managers and experts in the banks lose their jobs, lose their right to move to another investment firm or receive jail sentences in the cases of intent to defraud the investing public."

Canada’s securities regulators have put a price tag on incompetence. For $138.8-million and the cost of hiring a consultant, you, too, can bring down a $32-billion market by selling faulty products that you didn’t understand to unsuspecting investors, costing them millions of dollars in losses. It doesn’t even amount to chump change for multi-billion-dollar operations like National Bank, Canadian Imperial Bank of Commerce, and Scotia Capital, three of the noted ABCP players.

If regulators wanted to be meaningful, then fine them a year’s profit and shareholders would make sure it didn’t happen again by kicking out executives and boards on whose watch this happened.

The financial institutions in this country that manufactured, sold and distributed third-party asset backed commercial paper should get on their knees and kiss Justice Colin Campbell’s ring this Christmas. If it wasn’t for him agreeing to controversial legal releases in the ABCP restructuring, which granted financial institutions immunity from everything but fraud, they likely would have been litigated if not out of existence, then certainly to a poorer place than they were sent by our market regulators.

Yes, $138.8-million is a ton of dough, but not near as much as the hundreds of millions of dollars that companies and government agencies (nee, taxpayers) wrote off for buying what they thought was safe paper. We must wait a decade to find out the true harm these financial institutions inflicted on investors. That’s when the restructured ABCP notes mature and the real price tag will be known. It won’t be pretty.

In fairness to Justice Campbell, he had an ABCP gun to his head. If he didn’t agree to the releases he screwed over retail investors who stood to lose everything, and be tied up for years in court, so he elected the safe and prudent route. The legal releases set bad public policy and precedent, which is like a crack in the dam. It undermines the foundation and eventually leads to a flood. Already some courts have been asked to consider immunity releases. In fact, it’s probably malpractice for a lawyer not to ask for one.

The deterrence aspect of siccing the class action lawyers and litigation hounds on wrongdoers would have had a far greater impact than the inconsequential fines imposed by regulators. Instead, the penalties were kind of like grounding your kid for coming home late. Yeah, it hurts for a day or so, but then all is forgotten.

Going through a full-blown discovery stage and trial where corporate executives are called on the carpet — red-faced and forced to explain their actions — would have optically had more compelling consequences than fines. Sure, Coventree, the pointman in the third-party ABCP business, was destroyed, but it was the financial tadpole in this investing swamp. Few executives of any note lost their jobs. Most probably earned bonuses this year. There was no public damnation of those individuals who perpetrated this mess, nor contrition on their part.

If this is the extent of Canada’s capital market oversight — too little, too late, no teeth — then maybe investors should be cashing their RRSPs, abandoning our capital markets and putting hard-earned money into safer products like GICs and cash accounts. No, wait a minute, that’s how this problem started, investors wanted a safe haven and some of our top financial institutions let them down.

If Canadian regulators and the self-policing capital markets can’t properly oversee the most basic of investments, how can Canadians trust they are properly overseeing more complex equity markets? ABCP was a stain on Canada’s capital markets that we’ll wear for years to come. As a Canadian investor, I’m embarassed, even if the financial institutions aren’t.

Sunny FreemanToronto — The Canadian PressPublished on Monday, Dec. 21, 2009 5:28PM ESTLast updated on Monday, Dec. 21, 2009 7:25PM ESTSeveral of Canada's largest financial institutions will dole out $138.8-million for their role in the asset-backed commercial paper meltdown in settlements approved Monday.

National Bank (NB-T) will pay the majority with its share totalling $75-million in penalties and investigation costs.

Several other major players, including CIBC (CM-T) , HSBC and Laurentian Bank (LB-T) will make up the rest.

“National Bank Financial Group's actions reflect its commitment to work constructively with regulatory authorities and its clients,” the Quebec-based bank said in a statement.

The Canadian ABCP market ground to a halt in August 2007 amid fears the assets behind the notes included U.S. subprime mortgages and other high-risk loans.

The Ontario Securities Commission, Quebec's Autorite des marches financiers and the Investment Industry Regulatory Organization of Canada reviewed and approved seven different settlements over improper handling of the investments at some of Canada's biggest financial institutions.

The hearings were held in camera, meaning no members of the public were able to attend.

In the U.S., several recent high-profile cases involving securities violations have subjected those accused to intense media and public scrutiny.

Still, Alfred Apps, an insolvency lawyer with Fasken Martineau DuMoulin, said the settlements Monday represent a successful conclusion for all parties involved and will be beneficial for consumers and for the markets.

“It's a good day for financial regulation in Canada,” he said. “This is not a nominal amount and as a consequence of that, the industry is going to be changing its diligence and compliance practices to respond to what is happening in this case.”

He said the case is a wake-up call for the banks, which have already contributed money for the restructuring of the complex financial instruments.

“Everybody, including the regulators have learned a lesson from this experience, and to suggest that what has occurred is going to mean business as usual for everybody is just dead wrong.”

CIBC World Markets (CM-T) will pay a penalty of $21.7-million, plus $300,000 for the cost of the investigation, while HSBC Bank Canada will pay $5.925-million, plus another $75,000 in investigation costs.

CIBC and HSBC, which sold the papers to institutional clients, also admitted to “conduct contrary to the public interest by failing to adequately respond to emerging issues in the third-party ABCP market insofar as it continued to sell third-party ABCP...”

Scotia Capital Inc. (BNS-T) , which agreed to pay nearly $29.3-million to cover penalties and its share of the investigation, made a similar admission to IIROC, said Alex Popovic, the body's vice-president of enforcement.

The dollar amounts were based on the culpability of each institution, how many ABCP they sold and the specific allegations against them.

Those institutions, as well as National Bank and Laurentian allegedly did not disclose an e-mail outlining the subprime exposure of each ABCP to their mainly institutional clients.

Laurentian Bank agreed to pay $3.2-million for its role in the debacle.

Meanwhile, Vancouver-based Canaccord Financial Ltd. (CCI-T) will pay a total of $3.1-million and Credential Securities Inc. will pay $200,000.

They had been accused of failing to take adequate steps to ensure that retail clients understood the complexities of the third party ABCP.

A restructuring of Canadian ABCP was completed earlier this year, and most of the individual investors have received their principal back, but pensions and businesses were given notes that will mature over the coming years, although the notes can also be sold prior to maturity.

ABCPs are short-term investments with maturities of 30 to 180 days. They are backed by a pool of underlying assets and offer a slightly better yield than those offered on short-term government debt.

Aside from individuals, investors who lost money in the risky investments include Silver Standard Resources Inc. Jean Coutu, Quebec pension fund manager Caisse de depot et placement du Quebec and the City of Hamilton.

Michael Miles, 60, is a self-employed investor in Victoria, B.C., who put his retirement plans on hold after his account was frozen when the ABCP market collapsed. He said he did not even know he owned ABCP until after he could no longer withdraw money.

His account was frozen for about 18 months before he was able to negotiate a settlement to reimburse his losses in exchange for agreeing to support the restructuring.

“If you're self employed, which my wife and I are, and you have no assurity that your retirement savings will ever be returned to you, it's a huge emotional hit.”

He said Monday he was not happy with the financial settlements because no one was held personally responsible for the misdealings, criminal charges were not pursued, and no one had their right to practice withdrawn.

“We want to know who the heck is personally responsible and those people need to be investigated for criminal fraud.”

From Monday's Globe and MailPublished on Monday, Dec. 21, 2009 12:00AM ESTLast updated on Monday, Dec. 21, 2009 2:50AM ESTThe gap that permitted asset-backed commercial paper to be marketed and sold to unsophisticated investors has not yet been closed, but the settlements that will presumably be approved this week at regulatory hearings show that Canada's investment system has at any rate not allowed firms and institutions (which should have known better) to make a safe exit, with impunity, from the ABCP mess.(fines of less than one penny on each dollar gone missing, makes it pretty damn profitable though) (advocate)The ABCP meltdown proved that Canada, in spite of its stable banking laws, is not simply immune to the financial foolishness in the United States that led to an international credit crisis. Many Canadians with modest savings bought extremely complex interests that were indeed backed by assets, but many of these turned out to be among the toxic assets that became world-famous in the fall of 2008.

If Canada's securities laws had been consistent with their own principles, ABCP could not have been sold without prospectuses, or at least without offering memorandums approved by the regulators, to explain these investments and their risks. Not only the proverbial widows and orphans need to be protected; so do all non-experts who are saving for retirement. For that matter, the regulators' investigations have apparently found that some firms that sold these interests did not make sure their own salespeople understood ABCP well enough to explain it to the buyers.

The word "loophole" suggest conscious evasion of rules. But the regulatory gap that led to the freeze-up of the ABCP market in the summer of 2007 (and the subsequent insolvency proceedings) resulted from thoughtlessness of various kinds: thresholds for "sophisticated investors" that were too low; undue faith in investments that are rated by rating agencies; and the sale of investments by chartered banks, whose activities securities commissions do not usually need to worry about.

In spite of these exemptions, a few sweeping, general rules have been effective in the end, causing major expense and embarrassment to several financial entities. The rules of the Investment Industry Regulatory Organization of Canada, the self-regulating guild of investment dealers, include this: "Each dealer member shall use due diligence to learn and remain informed of the essential facts relative to every customer and to every order or account accepted." That, for example, is the basis for the hearings today in Vancouver about Canaccord Financial Ltd. and Credential Securities Inc.

Similarly, the settlements with the Ontario Securities Commission seem to be based on companies' duties to disclose new information that materially affects their businesses.

Though the existing regime has thus been able to attach consequences to the marketing of ABCP, new rules are still missing, 2½ years after the ABCP disaster. They should not have to wait for the next perverse financial ingenuity to implode.

When Chinese manufacturers were blending water and chalk together and selling it worldwide as “infant formula”, here in Canada trusted financial institutions were blending sub prime mortgages into investment pools and selling them as “top rated”. They continued even after learning that the investments were imploding. The big difference between countries seems to be in how the government helped the scam in Canada.

Government regulators (all thirteen Securities Commissions) gave permission to violate our laws to sell toxic products. (they have actually granted thousands of legal exemptions) I see this as indicative of a corrupted securities regulatory system. Iris Evans, my minister in charge of the Alberta Securities Commission refuses to talk. My request is for her to explain these matters or resign. Each Securities Commission and responsible Minister in every province could be asked to resign for violating the public trust.

Unanswered by Minister Evans: (seventh request)

-What public interest is served by allowing laws to be violated by people who sell investments? -Why are legal exemptions allowed without public input or public notice?-Where is the open transparency on several thousand such legal tricks?-Why is a public Minister suppressing this matter? Is protecting financial corporations more important than protecting the public?

The sellers of the failed investments obtained immunity from civil action. They also sought immunity from criminal action. This speaks volumes about our misplaced trust in bankers. It is also sad to see how our civil servants worked to hide and cover their own miss-steps in this dance.

Resignations are needed for public servants acting contrary to the public interest. An inquiry should be held. It is the largest investment failure in recent history. Class action (against regulators) and criminal investigation into negligence or breach of the public trust may also be warranted. Iris Evans again, please come clean or resign.

Discussions in Lethbridge, Calgary, Edmonton and Ottawa have ensued to consider civil or legal means of holding public servants to account. If you wish to participate in a “public accountability action” project contact lelford@shaw.ca

Larry Elford

Lethbridge AB

Larry Elford is a former member of the financial industry who is now speaking out and blowing the whistle on customer abusive practices by those who call themselves financial professionals.He earned the designations CFP, CIM, FCSI, Associate Portfolio Manager while working and maintains free investor protection sites outlining the tricks of the trade at:http://www.breachoftrust.caAndhttp://www.investoradvocates.ca

ABCP investors say they were duped by financial communityLast Updated: Thursday, April 10, 2008 | 5:22 PM ET Comments0Recommend10The Canadian PressThe breakdown of the $32-billion asset backed commercialpaper (ABCP) system amounted to criminal fraud that no one in Canada appears prepared to investigate or prosecute, a House of Commons committee was told Thursday.

"It's a free ride in Canada for financial crime," said LarryElford, a former Alberta financial adviser who now heads aninvestment advocacy group.

"The law simply does not apply to the financial industry."

'The current financial regulatory system is broken and offers noprotection to Canadian investors'—Financial analyst Diane UrquhartIn the first public hearing on the financial markets crisis thatunfolded from the U.S. subprime meltdown last summer, the Housefinance committee heard horror stories from three independent investors unwittingly caught up in the secretive, arcane world ofhigh finance.

One Victoria investor, Wynne Miles, 58, who described herself as self-employed and with no pension, had placed her life savings in what she supposed were government treasury bills, only to find out in July they had been transferred into non-bank ABCP without her knowledge.

Retired Alberta farmer Murray Candlish told a similar storyabout how his $350,000 in savings was invested in a triple-A rated trust he was assured was as secure as the Canadian banking system.

"Now our dreams are slowly disappearing as the value of ourinvestment erodes," Candlish told the committee.

The first-person testimonials held MPs from all four partiesspellbound for most of the two hours and surprised some, who said they were under the assumption investors knew what they were getting into.

"It's been like a red light going on for us," said Bloc Québécois MP Paul Crete, who at the end of the hearing proposed that the asset-backed commercial paper affair become a priority for the committee, after passage of the budget.

"We have to have people from banks, regulators, others who can tell us why this crisis is there and what are the solutions to this problem."

Thursday's witnesses, including investors and investmentexperts, had no trouble pinpointing the problem.

They said financial institutions they trusted duped investorsinto putting their money into ABCP with assurances the investments were rock solid, when they were in fact tied up in the U.S. subprime mess. And when the house of cards came tumbling down last summer, Canada's entire structure of oversight agencies was more interested in saving the system from exposure and collapse than in protecting innocent investors.

Even now, the system is protecting itself, they added.

While cautiously welcoming Tuesday's proposed "relief plan" by Canaccord Capital Inc. to repurchase up to $138 million ofthe debt held by 1,430 of its individual clients holding less than $1 million in the investment, Miles points out that acceptance comes with strings.

"The requirement that we waive our rights to sue is unacceptable," she said. "I feel as if I am being offered an ultimatum and that makes me very angry. We have been wronged."

Regulators criticized

Most witnesses were very critical of provincial and federalregulating bodies like the Ontario Securities Commission and the Office of the Superintendent of Financial Institutions for looking the other way while suspect and likely illegal practices were being carried out, failing to investigate abuses, and for often granting legal exemptions to financial institutions.

"The current financial regulatory system is broken and offers no protection to Canadian investors," said Diane Urquhart, aToronto-area independent financial analyst.

"They have violated provincial securities acts and the OntarioSecurities Commission has done nothing and stood by blindly."

Both Elford and Urquhart said the only solution is the creation of a national securities commissioner with the sole mandate to protect investors and no connections to the financial sector.

Part of the current problem, added Elford, is that the currentprovincial regulators have a conflict of interest and too close ties with the financial houses.

"They not only fail to protect consumers, but they giveCanadians a false sense of security," said Elford. "We are sitting ducks. If one finds a law being broken, there is simply no police agency to call that does not have a conflict of interest."

Some of the witnesses said that the system is so broken thateight months after the commercial paper was frozen, some Canadians still don't know that part of their investments are in ABCP.

Liberal finance critic John McCallum, a former vice-president of the Royal Bank, said the allegations are serious and need to be investigated, but he was not prepared to apportion blame at this time.

"I can't stand here today and say who's to blame, but we have heard disturbing allegations about regulators who may be in the pockets of the regulated," he said. "We need to find out what went wrong in this particular disaster and what we can do to make sure that future crises are less likely to happen."